People also watch

Honeywell International Inc, HON, earnings, trade, days, results, test, optionsThe Repeating Pattern in Honeywell International Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows

The Repeating Pattern in Honeywell International Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows

Honeywell International Inc (NYSE:HON) : The Repeating Pattern in Honeywell International Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows

Date Published:
2019-01-11

Disclaimer

The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

LEDE

There is a bullish momentum pattern in Honeywell International Inc (NYSE:HON) stock 1 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement.

This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.

Honeywell International Inc (NYSE:HON) Earnings

In Honeywell International Inc, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting one-day after that earnings announcement and then bought a three-week at the money (50 delta) call, the results were quite strong.

This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:

Rules

* Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:
* Open the long at-the-money call one-trading day after earnings.
* Close the long call 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 14 days).

This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a conditional back-test, which is to say, it only Triggers if an event before it occurs.

RISK CONTROL

Since blindly owning calls can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.

In English, at the close of every trading day, if the call is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the two-week period rather than waiting to close 14-days later.

Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay.

RESULTS

If we bought the at-the-money call in Honeywell International Inc (NYSE:HON) over the last two-years but only held it after earnings and after an earnings pop higher, we get these results: